Pressure cranking up on the Bank of England's policymakers to consider a rate rise as wages fall further behind prices

The Bank of England's governor Mark Carney and his fellow rate setters face an unenviable task when they meet this week in the wake of a stronger than forecast climb in inflation coupled with lacklustre wage growth.

As the new £10 notes launch, they are worth 2.9 per cent less in real terms than they would have been a year ago. This is well above the 2 per cent bullseye and perilously close to the 3 per cent point at which inflation is considered to be too high, and requiring a letter of explanation to the Chancellor.

The central bank's principle job is the maintenance of stable prices, and that is always the main yardstick by which it is judged. Economic growth and low unemployment are clearly important, but neither can come at the expense of stable prices or an economy quickly unravels.

Bank of England governor Mark Carney and his fellow rate setters face a tricky meeting this week after an unexpected pick-up in inflation.

In more 'normal' times the Bank's course of action would be clear and obvious at this juncture. Raise rates by half a per cent or more to nip inflation in the bud.

These are not normal times though, and a plethora of factors have to be considered. Raising rates too soon or by too much could shock the economy into a dangerous downward spiral.

The 'B' word is ever present in the daily news headlines, and Britain's impeding exit from the European Union complicates matters for the monetary policy committee to an extraordinary degree.

The sharp fall in the pound since the referendum makes it very hard to read how much of the inflation we are seeing is tied to real supply and demand factors and how much is purely the currency movement.

Other complications include the fact that economic and house price growth in the UK is slowing as inflation is rising, rather than trending in the same direction.

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Also, while the latest wage data has unexpectedly shown an increase in average earnings with the index in-line with last month's 2.1 per cent rise, that is someway off the 2.9 per cent climb in general prices reported the day before.

On balance a quarter point rise before the end of the year to take the sting out of things seems the best move, unless the inflation number comes back in to 2 per cent or less very quickly.

The Bank of England is likely to sit on its hands until the year is out though, given there appears to be a slight majority of doves on the committee at present. Some hawkish comments wouldn't go amiss though.

Ben Lord, manager of the M&G UK Inflation Linked Corporate Fund, thinks inflation is close to its peak, therefore the Bank can in fact afford to sit and wait.

'The Monetary Policy Committee should look through any headlines this week and stay their course, given concerns around the outlook for the consumer, and enormous uncertainty about the post March 2019 economy.'

'That being said, the risks of a 6-3 vote at the next monetary policy meeting have risen materially on the back of this number, as Andy Haldane has been pretty explicit on his discomfort with present levels of inflation, even if they are due to currency weakness and imports'.

One of these new £10 notes is worth 2.9 per cent less than a year ago, in real terms.

'However, heightened disagreement and debate is necessary in the potential event that the Bank of England needs to raise rates more aggressively than the market is pricing in,' Lord continued.

'Those expecting inflation to fall back from here are pricing the first hike to come in the middle of 2018 and the second hike to come at some point in the second half of 2019.'

Global market strategist at JPMorgan Asset Management Mike Bell also expects the Bank to remain on hold this week.

'On the one hand, UK business investment could rise, manufacturing appears to be doing well and unemployment is low. On the other hand, consumer confidence is weak, there are signs of weakness in the housing market, service sector business surveys remain subdued and there has been scant progress in the Brexit negotiations, keeping uncertainty elevated.'

'We expect the downside risks to growth to dominate the minds of the majority of the MPC. The higher inflation numbers are unlikely to shift the MPC's considerations as they expect inflation to decline over the next two years,' Bell continued.

'We don't expect a rate rise this year and rates are only likely to rise next year if wage growth shows a sustained period of acceleration in response to low unemployment, which may not transpire if Brexit related uncertainty remains high and the downside risks to the UK economy from slowing consumption and house prices materialise.'